Selecting Markets
Every startup must be designed to grow and entrepreneur must determine whether the idea to start company has the potential to grow or not. Nothing worse than spending all the time, efforts and hard works only to discover that the revenue never grow big enough or only grow similar to an average annual salary of a regular workers.
To avoid that, entrepreneur must estimate the market size potential of the idea to determine whether it is really worth to start the company or switch to better idea with better potential. Switching idea is not a failure; it means you are still learning to build a successful business. If you are afraid to fail in a startup, you should not be an entrepreneur. Failure when you just begin to develop idea is not failure but an important part of learning. I often tell students: “It is easier to fail in class than in life. It is easy to change your idea than change your company. When something does not work, decide what needs fixing and act on it. If the idea is not good enough, change it.”
Every potential market is dictated by number of existing customers, future growth in local market, and the chance to attract additional customers in global market. It means you should start small and grow in local market then global market. Each step requires a lot of learning as you grow your startup to an enterprise. Many entrepreneurs never think outside of their local market. They do not know the potential of growth therefore miss the larger market entirely.
There are many types of customer with different needs so it is important to separate different groups of customer that you want to reach. Customers can be organized into groups based on: Their needs, their distribution channels, and their types of relationships. As Entrepreneur, you must ask who are the most important. Who should you reach first and who would give you the best chance to be successful. Many entrepreneurs do not distinguish between customer groups as they like to focus on a large group of customers with similar needs and problems. It is only possible when your startup provide generic products such as selling electronic devices, TV, mobile phone, MP3 to whoever wants to buy.
As entrepreneur, you can start with a top down estimates based the Total market (How big is the market? Or the total number of possible customers); the available market (How many customer that I can reach with my sale channel) and the target market (Who would be the best customers to start with today?). For example, a mobile app has a total potential of 1 billion customers in the global market. If the app is not written in English than its potential is limited to local market, which is smaller, for example 10 million customers. The existing customers are the estimate of actual customers that may buy it which is much smaller, for example 1 million customers. By estimate the total market, the available market, and the target market, you can come up with a reasonable number to determine whether the opportunity is really worth your efforts or not. Of course, at this time everything is only a guess. That is why you must conduct market research to turn his guess into facts.
A top down estimate is the first step to come up with some numbers. Entrepreneur should avoid personal biases, any wishful thinking or hope at this time. You do not start business based on a wish or luck as everything must be based on facts and data. You need to learn how to use financial market reports, market research data, competitors data, and gather additional information from market news, Wall Street report, web articles, and whatever data available to validate the market potential.
The next step is to start from bottom up to re-check the calculated numbers so you can come up with reasonable estimates. For example, there are 1 million students go to college each year in your country but only a third can afford to buy smart phone so the total market for smart phone is approximately at 330,000 per year. Among smart phone users, only ten percent would download mobile app to play games so your available annual market is only 33,000. Among them, only 10% like to play “crossword puzzle” game that you build so your target market is only 3,300 customers. If you sell your game at $1 per download then you can make $3,300 per year. If your game is written in English then you can expand it to 50 English speaking countries. if your market data calculation is correct then your potential earning would be $3300 X 50 = $165,000 per year.
Of course, no one can really estimate market for an idea because it does not exist yet. But it is possible to estimate based on similar products or any comparable companies. Based on your market research, you learn that ABC, another company that has similar product make $300,000 per year and XYZ company make $500,000 per year. It means maybe your calculation is too conservative. In this case you could adjust it to $200,000 or $250.000 in the low estimates or $300,000 to $400,000 on the high estimates. As entrepreneur, you must check whether these companies can grow as fast as your estimate or not then make the adjustment accordingly. You want to check their growth rate per year and use similar projection to estimate how fast you can grow in the next three to five years.
It takes time, efforts and a lot of hard work to develop a startup. It also requires research, review, tracking market trends to determine whether your idea is worth your efforts or your startup is really profitable before you even start the company. By following these steps systematically, you will avoid the headache, the frustration as well as wasting your own money to pursue something that may not bring you the benefit that you expected.
Sources
- Blogs of Prof. John Vu, Carnegie Mellon University
